What is a 403(b) plan? - Brought to you by Empower

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A 403(b) plan is similar to a 401(k) plan with a few exceptions. The most notable difference between 401(k)s and 403(b)s is that 403(b) plans are restricted to employees who work for non-profit organizations, such as schools and charities. Employees of religious institutions are eligible for special 403(b) plans if their employer offers them.

Just like 401(k) plans, 403(b) individual retirement plans provide a great way to save for the future. This is especially true if you work for an organization that matches all, or a portion of, your contributions each pay period. Continue reading to learn more about how 403(b) plans work, as well as the pros and cons of investing in this type of retirement plan.

How does a 403(b) plan work?

When you enroll in a 403(b) plan, you can determine how much you want to contribute to this plan each pay period. You can either select a flat amount, such as $100, or a percentage of your overall pay. For example, if you want to contribute 3% of your earnings to a 403(b) plan and you make $2,500 a pay period, then the amount you contribute to your 403(b) is $75. Your employer automatically deducts this amount from your paycheck and transfers it into your 403(b) account.

The good news is that when investing in a traditional 403(b) plan, contributions are taken out of your pay before taxes, which can reduce your taxable income. Using the example above, if you contribute $75 to your 403(b), you only pay income tax on $2,425. Additionally, many employers offer matching contributions up to a set amount. This benefit can help you double your contributions and grow your investment faster.

You are, however, limited to the amount you can contribute to your 403(b) throughout the year. For 2023, the most you can contribute to a 403(b) is $22,500. When including employer contributions, the annual contribution limit is $66,000 for 2023 or 100% of your annual salary for the year, whichever is less. In rare cases, you may work for an employer that offers both 403(b) and 401(k) retirement plans. While you can make contributions to both plans, your combined annual contribution limit cannot exceed that $22,500 threshold for 2023.

The two types of 403(b) plans

If you’re considering investing in a 403(b) retirement plan, it’s important to understand that there are two different types of plans available. Not all employers offer both plan options, but if your organization does, make sure you know the difference before you enroll.

Traditional 403(b) plan

A traditional 403(b) plan is the most common option for investors. You make contributions to this type of plan on a pre-tax basis. This factor means that you don’t pay taxes on the money you’re investing now. Instead, you will owe taxes on the disbursements you receive once you retire. This is a good option for those who anticipate being in a lower tax bracket during retirement than their current one.

Roth 403(b) plan

On the other hand, you make contributions to Roth 403(b) plans on a post-tax basis. Since you’re paying taxes on the money you earn before investing it, you don’t have to pay taxes later when you withdraw the funds. Additionally, you don’t pay taxes on any earnings on your contributions (subject to certain withdrawal requirements). This is a good option for those who don’t want to worry about an additional tax burden during retirement or those who expect to be in a higher tax bracket after retirement.

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